Comparing Financial Institutions

Before you begin negotiating car prices with a dealer, you should shop for a loan source that offers the best annual percentage rate (APR). An interest rate can vary as much as three percent in a given area. Also consider the initial investment and term length when shopping for a loan. A conservative rule of thumb is to put at least 20% down on a new vehicle and finance it for a maximum of four years.

Finance Companies – A finance company that is owned by an auto manufacturer, such as Ford Motor Credit or General Motors Acceptance Corporation, is called a captive finance company. Captive finance companies account for approximately 20% of new car loans. Finance companies buy a loan wholesale, mark it up and sell it retail. It may be easier to get credit through a finance company than through a bank, but it is usually at a higher interest rate.

Dealers – Dealers typically offer a higher APR than banks and credit unions. You may have better luck financing through a dealer if you have a bad credit history, as some dealers specialize in high-risk loans. Dealers may act as middlemen for a bank or a captive finance company, which could raise the interest rate to allow for their profit. Some dealers offer lower interest loans as an alternative to a customer rebate or dealer cash incentives. Sometimes a dealer’s deal is the best deal.

Banks – Banks are the most common source for financing and account for about 40% of new car loans. You do not have to have an existing account at the bank to acquire a loan with them, so you should check with several in your area for the best APR. Some banks offer pre-approved loans, which allows you some flexibility in shopping. You may be able to negotiate better terms, such as a lower APR, if you have a longstanding relationship with a bank.

Credit Unions – You must be a member of a credit union. They account for approximately 25% of new car loans. Credit unions offer the best loan rates, typically one half to one percentage point lower interest than bank car loans.

Online – The Internet allows you to compare rates nationwide, any time of day or night. There are several “e-loans” available exclusively online, and many sites also have built in calculators to help you determine the cost of financing your vehicle.

Home Equity Loans – The positive difference between what you paid for your property and its current value is called the equity. This equity can be used as collateral on a loan, which you could use to purchase a car. You can obtain a home equity loan at a bank or credit union. In effect this is a second mortgage on your home and is, therefore, tax deductible. If you have an approved line of credit and don’t have to pay any new origination fees, this is an especially good deal. Consider this type of loan wisely, as you could lose your house if you default!